Special Report on Investment Trusts (3): Tax-efficient way to divide up the spoils: The split capital trusts can meet a variety of requirements, from boosting income to planning school fees
Wednesday 20 January 1993
These trusts have many different types of shares to suit different taxation requirements. There are shares for investors who want a large income but no capital gain, and for investors who want a capital gain but no income.
Stephen Trowbridge, a director of the Liverpool stockbroker B W D Rensburg, said: 'When the investment trust industry was running scared five to six years ago . . . they came up with split capital trusts. Basically they split investment trusts down into, say, three or four interesting tax-planning parts. So instead of having one bog-standard trust, you have different types of share, some of which are entitled to the trust's income, some to the capital gain and so on.'
Split capital trusts are particularly tax-efficient for purposes such as inheritance tax planning, school fees savings plans, and as an alternative to gilts.
These investment trusts have an underlying portfolio of shares just like any other, but unlike others they split up the capital gains on the portfolio and the dividends and allocate them to different types of share. They also have a set date on which to be wound up.
They proliferated in the second half of the 1980s, at a time when the investment trust industry was desperate to attract new investors, because they proved to be particularly popular with investors who wanted to minimise their tax bills.
Before then, there were some split capital investment trusts, but they were typically comparatively simple savings vehicles with only two types of share. One type was the income share which was entitled to all of the income in the split capital investment trust's underlying portfolio, and the other type was the capital share which was entitled to all the capital growth.
But as more and more investment trust houses launched split capital trusts, so the variety of share grew in number. The most common types today are called zero dividend preference, income, and capital. Split capital trusts may comprise of all or just some of these types of share.
Zero dividend preference shares are perhaps the most favoured for tax purposes. As their name suggests they pay no dividends, but have first claim to the trust's capital when it is wound up.
They are issued at a certain price and redeemed at a predetermined higher price when the trust is wound up. So their capital value should steadily increase until that time.
Income shares are generally entitled to most of the dividends earned by a trust's underlying portfolio of shares. Some of these are designed to hold their capital value, but pay out a high income. Others, often dubbed 'annuity' shares, are designed to pay out an even higher income, but lose most if not all of their capital value.
Capital shares are entitled to all or most of the capital in a portfolio after the preference shares have been paid off. As a result they tend to exaggerate the capital movements of the underlying portfolio and are said to be 'geared'.
Mr Trowbridge says split capital shares minimise taxation when used for the following purposes:
(1) School fees planning. He recommends that a parent planning for school fees should buy zero dividend preference shares in the child's name. Like adults, children have a pounds 5,800 annual capital gains tax allowance and so this is highly tax-efficient.
More optimistic parents, 'and you've got to be optimistic if you are planning to pay school fees these days', might also top up the holding of zeros with capital shares, he said. But this is only for those who are optimistic about the stock market's prospects and prepared to take a loss on the capital shares if they are wrong.
(2) Inheritance tax planning. He recommends that parents who wants to give away capital early enough to live for another seven years and avoid inheritance tax but maintain an income in the meantime buy zeros for their children and income shares for themselves.
(3) Alternative to gilts. Zeros have a similar total return to gilts and are a handy alternative for investors who do not use their pounds 5,800 annual capital gains tax allowance. Mr Trowbridge advises that by selling part of the capital gain each year, an investor can effectively get a tax-free income.
But Lewis Aaron, a senior investment trust analyst at S G Warburg Securities, warns that investors should make sure they are well advised before buying these investments. The zeros are not guaranteed and there is a risk they might not make the capital gain anticipated; an investor should make sure he is aware of whether an income share is an 'annuity' or not; and some capital shares are more highly geared than others.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
It scooped up an unprecedented 11 Academy Awards when it was first remade in 1959
Olympic diver has made his modelling debut for Adidas
Actors star in Woody Allen's 'Magic in the Moonlight'
Revellers will have to pay to see New Year's Eve fireworks in London
...and the perfect time to visit them
Newcastle winger reveals he has testicular cancer - and is losing his trademark long hair as a result
Man's attempt to avoid being impounded heavily criticised
- 1 iPhone 6 review: bigger, thinner, faster, brighter - Apple proves you can make the best better
- 2 Sports Direct security guard allegedly banned Jewish schoolboys and told them: 'No Jews, no Jews'
- 3 Watch a man race the Circle line - and win
- 4 Pakistani passenger power forces two politicians off plane
Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
Scottish independence referendum: A nation divided against itself
The political class is doing what Hitler couldn’t – destroying Britain
Scottish independence: Nationalist leader Jim Sillars threatens pro-union companies with 'day of reckoning' after independence
Scottish independence: Yes campaign feels the heat as Alex Salmond's NHS claims come under furious attack
Portuguese academic says British are 'filthy, violent and drunk'
iJobs Money & Business
£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...
£20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...
£20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...
£20 - 24k + Benefits: Guru Careers: This is a great opportunity for an enthusi...
Day In a Page
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony